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ESG-focused valuations for critical minerals in the energy transition

Securing the Future

Lead authors: Rochel Hoffman (Partner – ESG M&A) and Rafaela Stalph (Manager – ESG M&A)
Contributors: Salil Zutshi (M&A Valuations), Carrie Grimes (Partner – Consulting), Alexandra White (Partner – M&A)

As part of the global energy transition, securing access to critical minerals essential for EV batteries remains a significant challenge for the automotive industry. As a result, auto OEMs (Original Equipment Manufacturers) are exploring options to vertically integrate and mitigate their supply chain risks.

While long-term offtake agreements are now the norm in the industry’s procurement strategies, OEMs are taking additional steps to invest directly in the critical minerals value chain, such as mining, refining and precursor materials. With analysts and research firms forecasting a lithium supply deficit of 800,000 – 1.2 million tonnes by 20301, it’s unsurprising OEMs are eager to secure raw materials in a more direct way. This is evident through a dramatic increase in upstream investments made by OEMs in the past year – with 18 investments made by OEMs in 20222, tripling from 2021.

While auto OEMs play a crucial role in facilitating the energy transition and creating a sustainable future through manufacturing of zero emissions vehicles, the means to this end goal must also be sustainable.

Alongside securing supply through mining partnerships and acquisitions, auto OEMs recognise that pursuing new supply chain and inorganic growth strategies means new risks to their business, specifically regarding potential environmental and social impacts. Several OEMs also have ambitious ESG commitments and targets, compelling them to carefully navigate the alignment of their sustainability objectives when investing and operating in the mining industry, driving distinct and larger ESG footprints.

Lithium, cobalt, nickel, copper and other critical battery minerals are often concentrated in higher-risk jurisdictions, such as the Democratic Republic of Congo, with increased risk of human rights abuses, cultural heritage impacts and environmental incidents occurring3. Auto OEMs are considering how the ESG performance and ESG risks of a mining operation impact the attractiveness and ultimately the valuation of an asset and how this should be reflected in a transaction context.

Investing in and partnering with mining companies located in lower risk jurisdictions, such as Australia, Canada or the United States, is one approach OEMs are taking to reduce exposure to ESG risks4. Although mining assets in these jurisdictions are not void of ESG risks, in comparison to countries with a weaker rule of law, the geopolitical stability and legislative requirements in these nations can reduce the overall ESG risk exposure of mining assets. However, mining operations in these jurisdictions can be higher on the cost curve relative to developing countries.

Beyond risk-reduction strategies focused purely on jurisdiction, OEMs must also consider the ESG performance, risk and opportunities of the mining asset itself, and required ESG-related uplift and remediation activities prior to acquisition. This could relate to environmental and work health and safety matters, tailings management, as well as community engagement and social licence to operate.

Historically, businesses have found quantifying ESG impacts challenging, particularly around the impact ESG has on future cashflows, risks (and the cost of capital) and overall asset valuations. As a result, ESG has often been disregarded or seen as a second-order, qualitative consideration, leading to unexpected costs and liabilities occurring post transaction. Conversely, ESG matters can also provide value creation opportunities, for example in green premiums and decarbonisation opportunities, which, if identified and assessed, can provide acquirers with the ability to spot attractive targets the market may be currently undervaluing.

Consideration for and quantification of ESG in transactions extends beyond the vertical integration plays made by OEMs. There are a range of other important players in the mining and battery value chain crucial to driving the sustainable transformation of our economy. This includes businesses that provide engineering and maintenance expertise, mineral processing and analytical capabilities needed for mineral extraction and refinement, as well as battery recycling capabilities.

All investor groups, including corporates and private equity firms looking to acquire assets in the mining, battery and EV industries need to understand what ESG means in the context of specific transactions and how to effectively incorporate ESG into valuations.

Quantifying ESG should be viewed with a materiality lens and by taking an issue-based approach, with consideration of the jurisdiction where the asset is located, as well as the ESG performance of the target and the ESG risks and opportunities present in the broader value chain.

While quantifying ESG ultimately needs to be tailored to the specifics of each transaction, ESG costs and revenues can be assessed across a range of operational, regulatory/legal, reputational and market categories. For example, there may be operational-related ESG costs associated with constraints in water access and use during periods of drought, regulatory-related ESG opportunities associated with government subsidies/preferential tax treatment for investment in low-emissions technologies, or market-related ESG opportunities associated with developing new ‘green’ products and services to meet changing consumer preferences and demand. The ESG features of an investment, and how they affect overall risk, should also be considered in determining the appropriate cost of capital to assess the investment.

Ultimately, consideration of ESG is crucial to developing a holistic understanding of the risks and opportunities and potential costs and revenues associated with a transaction. In the case of OEMs, the benefits of securing a supply of critical minerals to manufacture zero-emissions vehicles only focuses on a small part of the larger picture. Achieving a sustainable, low carbon future hinges on the ability of investors to consider the broad spectrum of ESG matters and take a holistic approach to asset valuation.

1. Argus Media, OEMs Move Upstream to Secure Battery Materials, 2022,
2. Fastmarkets, OEMs turn to Junior Miners to Secure Supply and Vertically Integrate, 2023,
3. Council on Foreign Relations, Why Cobalt Mining in the DRC Needs Urgent Attention, 2020
4. Tesla has been the most prolific automaker in securing supply agreements. It has lithium offtake agreements with Australian developers Core Lithium and Liontown Resources, as well as nickel supply agreements with Australia-UK resources firm BHP and Brazilian resources firm Vale for nickel from Canada. It also has an offtake agreement with Australia's Syrah Resources for graphite-based active anode material from its Vidalia plant in the US.